1997 (5) TMI 73 - AT - Income Tax

Summary

Issues Involved:
1. Adjustment of unabsorbed depreciation.
2. Interpretation of Section 10B.
3. Application of judicial precedents.
4. Beneficial interpretation of tax provisions.

Issue-wise Detailed Analysis:

1. Adjustment of Unabsorbed Depreciation:
The assessee, a 100% export-oriented industrial unit, did not claim benefits under Section 10B for the assessment years 1988-89, 1989-90, and 1990-91 but claimed them from 1992-93 onwards. For the assessment year 1994-95, the assessee had income from other sources and carried forward unabsorbed depreciation from 1988-89, which it adjusted against the income from other sources, resulting in a nil total income. The Assessing Officer accepted this adjustment, but the CIT, exercising powers under Section 263, considered this adjustment incorrect and directed that the unabsorbed depreciation should be adjusted against the income of the export-oriented business undertaking. The CIT argued that unabsorbed depreciation forms part of the current year's depreciation as per Section 32(2) and should be adjusted against the business income of the industrial undertaking.

2. Interpretation of Section 10B:
The assessee contended that under Section 10B, the profits and gains of the industrial undertaking, derived from the export-oriented undertaking, are not to be included in the total income. It argued that "profits and gains" have a broader connotation than income computed for income-tax purposes and should be calculated according to ordinary commercial principles, excluding unabsorbed depreciation from earlier years. The CIT, however, relied on judicial precedents to argue that unabsorbed depreciation must be adjusted against the income of the said undertaking.

3. Application of Judicial Precedents:
The CIT relied on decisions from the Supreme Court, including CIT v. Virmani Industries (P.) Ltd., Cambay Electric Supply Industrial Co. Ltd. v. CIT, and Rajapalayam Mills Ltd. v. CIT, to support the adjustment of unabsorbed depreciation against the income of the industrial undertaking. The assessee, on the other hand, cited decisions from the Karnataka High Court, such as CIT v. H.M.T. Ltd., and other High Court decisions like CIT v. Siddaganga Oil Extractions (P.) Ltd. and CIT v. Patiala Flour Mills Co. (P.) Ltd., to argue against such adjustments.

4. Beneficial Interpretation of Tax Provisions:
The assessee argued that Section 10B is a beneficial provision allowing special benefits to 100% export-oriented units and should be interpreted liberally. The Supreme Court's judgment in CIT v. U.P. Co-operative Federation Ltd. was cited to support a liberal construction of beneficial provisions. The Department, however, contended that the income from the export-oriented unit must be computed separately, adhering to all relevant provisions of the Income-tax Act, and that unabsorbed depreciation should be treated on par with current year's depreciation for absorption against business profits, as supported by the Supreme Court's decision in CIT v. Jaipuria China Clay Mines (P.) Ltd.

Conclusion:
The Tribunal found that there is no direct decision on this specific issue and that the decisions relied upon by both sides pertain to deductions under sections like 80J and 80-I, which are not directly applicable to Section 10B. Section 10B allows complete exemption for profits and gains derived from 100% export-oriented undertakings, unlike deductions under Chapter VI-A. The Tribunal agreed with the assessee's interpretation that "profits and gains" refer to gross profits before allowing depreciation. The Tribunal concluded that the assessment order allowing the adjustment of unabsorbed depreciation against other income was correct and not erroneous or prejudicial to the revenue's interests. Consequently, the CIT's order under Section 263 was deemed bad in law and was cancelled, allowing the assessee's appeal.